The “Princelings” and China’s Corruption Woes

Last week, the Communist Party’s Propaganda Ministry blocked all internet keyword searches relating to a Namibia corruption investigation involving a firm by the name of NucTech. NucTech, as it so happens, was led by Hu Haifeng, the 38-year-old son of President Hu Jintao, until his recent promotion to party secretary of Tsinghua Holdings, a conglomerate that oversees state-held high-tech firms (including NucTech) that have been spun out of the prestigious Tsinghua University. According to a news article in AFP Nuctech won a $55.3 million Namibian contract for airport scanners in 2007. Namibia’s Anti-Corruption Commission recently discovered that $12.8 million of payments for this work were diverted from Nuctech to Teko Trading, a Namibian consulting firm. This has resulted in speculation that Teko Trading helped NucTech win the large government contract through bribery.

Observers note that when Chinese companies embrace globalization, they often continue the murky practices – bribery, kickbacks, extravagant banquets – that are so familiar at home. Indeed, in China, money and political power often go hand in hand with wealthy businessmen relying on their close bonds with powerful politicians. In December 2006, for instance, Junior Hu’s NucTech won a multi-million dollar contract with China’s aviation authority to supply security scanners for all the 147 airports in China due in large part to strong political backing.

The attention brought to this case has focused the media spotlight on the unfair privileges of the “princelings” – the offspring of the Communist Party elite. Many of these princelings went into business as the country started to open up, enjoying positions at the top of large state-owned-enterprises controlling much of the country’s resources. For example, the son of current Premier Wen Jiabao, Wen Yunsong, is CEO of Unihub Global Networks, a large Chinese networking company. The daughter of former premier Li Peng, Li Xiaolin, is chairman of China Power International Development Ltd., an electricity monopoly. Li’s son, Li Xiaopeng, was chairman of state-owned Huaneng Power International, the country’s largest independent power company, until his promotion to Deputy Governor of Shanxi Province. Most (in)famously of all, Jiang Mianheng, son of former president Jiang Zemin, controlled a telecommunication empire when senior Jiang was in power. While several corruption investigations indicated his involvement, he and the other princelings appear to be beyond the reach of the legal apparatus.

An article in Nandu Daily, one of China’s most liberal and popular news outlets with a circulation 1.7 million, reports that 91 percent of multi-millionaires are the offspring of the party elite according to research from the Chinese Academy of Social Sciences. The growing affluence of this group follows the wider national trend of the growing disparity between the poor and the rich. The same Nandu article notes another study which indicates that a tiny 0.4 percent population controls 70 percent national asset in China, no doubt among the most striking ratios in the world.

China’s remarkable economic development has gone hand in hand with the rise in nepotism which has powerfully distorted the distribution of its benefits. As a result, China’s wealth is concentrated in only a very small share of the population. In fact, despite enormous GDP growth, a large share of the population is not much better off from a decade ago. The book “Capitalism with Chinese characteristics” by Huang Yasheng demonstrates using detailed quantitative analysis that China’s state-directed economic policies since the 1990s are essentially anti-poor. Huang’s book attributes Shanghai’s strong GDP performance not to indigenous private enterprise but rather to state-controlled (and subsidized) corporations and their foreign partners, with the gains flowing to the state – and their favored business people – and overseas rather than to the general population. In fact, Huang documents how Shanghai actively discriminates against private enterprise to protect well-connected state-owned enterprises. When the state plays a bigger role in the process of development, politicians are inclined to rent-seeking. As a result, corruption in China is pervasive. With unethical business practices so common at home, it is unsurprising that such behavior would carry over to its companies’ operations overseas.

The state propaganda machine mesmerizes the world with lavish skyscrapers and extravagant glory projects in coastal cities while charming its citizens with grandiose economic promises. But when there is no transparency and unchecked symbiosis between the wealthy and the powerful, the majority of the population will continue to miss out on China’s growing affluence. It will be interesting to see, for instance, how much of China’s celebrated stimulus package will truly end up in the hands of ordinary citizens rather than well-connected developers and those at the top of favored state-owned enterprises.